PARIS (MNI) – Germany, in a significant policy shift, is supporting
proposals to increase the lending capacity and authority of the
Eurozone’s E440 billion rescue fund, the Financial Times reported
Thursday.

The newspaper, citing unnamed sources in Berlin and Brussels, said
the German government was prepared to increase financial guarantees for
the European Financial Stability Facility if that was needed to expand
its scope.

The new German position, if verified, would represent a sharp
turnaround for Berlin and help ease the way for an aggressive new
Eurozone plan to combat the sovereign debt crisis.

But Germany was not prepared to confirm its apparent shift.
Officials in Berlin — and in Paris — continued to insist on Wednesday
there was no urgent need to increase EFSF funding.

Indeed, Portugal’s successful auction Wednesday of E1.2 billion in
10-year bonds at a rate well below the 7% considered “unsustainable” may
ease some of the pressure for quick action, since Lisbon is widely
considered the next country in need of aid, after Greece and Ireland.

But if the recent history of this crisis is any guide, the respite
might well be temporary. Portugal still has a steep hill to climb, and
data released Wednesday by the country’s central bank showed Portuguese
banks increasingly dependent on emergency liquidity from the ECB.

Numerous press reports in recent days, as well as comments by
senior EU officials, have indicated that European leaders are working on
a new plan that could boost the authority of the EFSF, perhaps by
allowing it to issue short-term credit lines to member states and even
buy sovereign government bonds — moves that would take pressure off the
European Central Bank.

European Commission President Jose Manuel Barroso on Wednesday
backed a wider role for the EFSF and predicted it would be endorsed by
EU leaders at their summit on February 4. Olli Rehn, Europe’s
commissioner for Economic and Monetary Affairs, also endorsed the idea.

According to the FT, European officials said Barroso had discussed
the matter with ECB President Jean-Claude Trichet, International
Monetary Fund Managing Director Dominique Strauss-Kahn and EFSF head
Klaus Regling, all of whom supported the idea.

EU members have also been reported to be in discussions on how to
leverage the full E440 billion of the EFSF without endangering its AAA
status. Under current rules it cannot lend nearly that amount since it
is required to maintain a sizeable reserve in order to keep the top
credit rating.

According to the FT, Germany’s willingness to provide new financial
guarantees for the EFSF would depend in giving the facility new tasks.
Berlin would not accept an increase in the EFSF’s size without a
corresponding increase in its role, the paper said, quoting a
“well-placed” source. “The size is the least of our problems. It depends
on its needs and its instruments,” the source was quoted as saying.

The paper also noted that efforts to boost the lending capacity or
the power of the EFSF would probably face a stiff challenge in Germany’s
parliament.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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